Pakistan’s abysmal tax compliance rate has been a constant source of worry for the authorities, but the problem has remained too hot to handle for successive governments. That may be about to change under the caretaker government headed by PM Anwar-ul-Haq Kakar.
By Muhammad Ali
ISLAMABAD: In a bid to plug leaky tax coffers and cultivate a culture of honest contribution, Pakistan’s tax authorities are preparing to take action against over a million potential tax dodgers, Independent Pakistan can report.
The Federal Board of Revenue (FBR) has identified over one million individuals and associations of persons (AOPs) who failed to file a voluntary tax return despite earning incomes that make them liable to pay tax, official sources say.
Pakistan’s tax-to-GDP ratio is among the lowest in the world, hovering around 11 percent. This year, the nation of 240 million saw only about 5 million file an income tax return – over 2 million who showed nil income.
It does not help that the informal economy is estimated to account for a significant portion of Pakistan’s GDP, making it difficult to track income and collect taxes. However, tax authorities have been building capabilities to track income and assets for several decades now.
Previous attempts to improve tax compliance have met with limited success, often hampered by bureaucratic inefficiencies and corruption as well as political patronage networks.
Now the Federal Board of Revenue (FBR) has identified over a million individuals and associations (AOPs) who’ve shirked their tax obligations despite earning taxable incomes.
The FBR has identified those persons or companies who are required to get registered and file their returns under Section 114 of the Income Tax Ordinance 2001.
The FBR’s net is vast, encompassing companies, individuals exceeding a 600,000 PKR annual income (including salaried individuals), property owners with sizable holdings, luxury vehicle owners, and even those with hefty electricity bills. Non-profits and foreign income holders are also under scrutiny.
Companies are top most on the FBR’s radar and officials say every company, irrespective of any conditions, whether earning exempt income or still in the start-up stage or any other situation, is required to file a tax return if its income becomes taxable.
Individuals and associations of persons are required to file a tax return if their annual income exceeds PKR 600,000. This includes salaried individuals if annual receipt from salary exceeds PKR 600,000 in a tax year.
Filing a tax return is also mandatory for any person who owns immoveable property with land area of 500 sq. yards or more located within the municipal limits, a Cantonment Board, the Islamabad Capital territory, or in a rating area; any person who owns a flat in areas falling within the municipal limits, a Cantonment Board, or the Islamabad Capital Territory; and any person who owns a flat with covered area of 2,000 sq. feet or more located in rating areas.
Any person who owns a motor vehicle having engine capacity of 1000 cc or more is also required to file a tax return, as does any person who has obtained a National Tax Number; and any person who is the holder of commercial or industrial electricity connection with an annual bill exceeding PKR 500,000.
The tax return mandate automatically applies to resident individuals required to file foreign income and assets statement, and resident persons registered with any chamber of commerce and industries or any trade or business association or any market committee or any professional body including Pakistan Engineering Council, Pakistan Medical and Dental Council, Pakistan Bar Council or any provincial Bar Council, Institute of Chartered Accountant of Pakistan or Institute of Cost and Management Accountant of Pakistan.
Non-profit organisations are required to file tax returns irrespective of conditions, as is every person whose income for the year is subject to final taxation.
Individuals and AOPs falling within any of these nine categories were required to file their income tax returns, but most of them failed to comply with the mandate.
Now the FBR is planning to launch a vigorous campaign to penalise those who have fallen foul of the legal mandate.
The Income Tax Ordinance, 2001 (ITO) — the primary legislation governing matters relating to income tax in Pakistan — empowers the tax authorities to impose strict penalties for those found in violation of the law.
ITO came into force on July 1, 2001, but has since been amended several times, most recently in 2022.
The impending crackdown marks a significant step towards a fairer and more robust tax system, but the challenge remains immense. Pakistan’s informal economy thrives, and cultural resistance to taxation persists.
To achieve lasting success, the FBR must not only enforce penalties but also foster trust and transparency, convincing citizens that their contributions are crucial for national development.
Copyright © 2021 Independent Pakistan | All rights reserved
